Over the last several years, we have been vocal advocates of utilizing an updated and enhanced index approach to add value over the traditional Bloomberg Barclays U.S. Aggregate Index (Agg). This has been driven by market forces driving down global interest rates combined with a dramatic shift in bond issuance. As the U.S. Treasury has ramped up borrowing, the sector weights of Treasuries in the Agg ballooned. As a result, the Agg no longer provides investors with adequate income or expected returns, in our view.
In response, we created the WisdomTree Barclays Yield Enhanced U.S. Aggregate Bond Fund (AGGY), which has grown to over $300 million in assets since its launch in 2015.1 Last year, in order to better manage duration targets and extend usage of this concept, we developed the WisdomTree Barclays Yield Enhanced U.S. Short-Term Aggregate Bond Fund (SHAG). In today’s environment, many investors are concerned about rising interest rates. As we show in this post, we believe the blending of yield enhanced core strategies can be a powerful tool for balancing risk/return while at the same time correcting for inefficiencies in the traditional Agg.
Strategy Review
Both the Bloomberg Barclays U.S. Aggregate Enhanced Yield Index (Enhanced Yield) and the Bloomberg Barclays U.S. Short Aggregate Enhanced Yield Index (Short Agg Enhanced Yield) start with the same investable universe as the Agg. However, they seek to enhance yield by optimizing the weights of securities in the index across a variety of sector, credit quality and maturity buckets (subject to a series of constraints). For the short-maturity strategy, eligible maturities are capped between one and five years.
Blending Exposures
Today, we are able to analyze a continuum of portfolios based on essentially the same investment rationale but with varying interest rate risk and income profiles. As we show below, investors could boost income by 27 basis points (bps) while keeping interest rate risk constant by owning a 70% Enhanced Yield/30% Short Agg Enhanced Yield blend. Similarly, investors could keep their income profile on par with the Agg while reducing interest rate risk from 6 years to 4.2 years by owning a 30% Enhanced Yield/70% Short Agg Enhanced Yield blend. For investors interested in boosting income and limiting risk, a simple 50%/50% blend strikes a reasonable balance, in our view.
